Pros & Cons of Repayment Mortgages

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Pro's and Con's of Repayment Mortgages

You are guaranteed to own your property outright

Repayment Mortgages Make Moving Up More Affordable

Interest Rate Increases Have Less Effect

Guaranteed to own your property outright

Repayment mortgages have one huge advantage over interest-only or endowment mortgages.

Once the mortgage term is complete, you are guaranteed to own your property outright.

There is NO risk of not being able to pay off the mortgage, as long as you make all your payments.

Unlike endowment mortgages, you do not have to worry about your endowment insurance policy payout falling short of what you need to pay off your lump sum.

Unlike interest-only mortgages, you do not have to worry about whether the investments you have planned to pay off the capital sum will be successful.

Either of these scenarios can result in you having to sell or remortgage your home to pay back the capital on your original mortgage. This simply cannot happen with a repayment mortgage, as you pay off the capital sum as you go.

Repayment Mortgages Make Moving Up More Affordable

Imagine two people, Mr. Repayment and Mr. Interest-Only. Both bought identical houses at the same time and for the same price. But Mr. Repayment chose to take a repayment mortgage, while Mr. Interest-Only took an interest-only policy.

They both have the same income, and eight years after buying their houses, they both want to move to a bigger home.

Question: Who can afford to spend the most on their new home?

Answer: Mr. Repayment can.

The reason for this is that while Mr. Interest-Only has been benefiting from lower monthly payments on his mortgage, he has not been reducing the amount he owes at all – he has only been paying the interest on it.

Mr. Repayment, on the other hand, has been steadily reducing his capital sum as well as paying interest. He may have had slightly higher monthly payments each month, but when he sells, he will be left with a bigger profit than Mr. Interest-Only because he will owe the building society less on his current mortgage.

In the short term – under three years, for example – you are unlikely to make any significant reductions on the capital sum of a repayment mortgage. Over longer periods, however, the benefits of a repayment mortgage can really kick in, making it more affordable to move to a new home if and when you want to.

Interest Rate Increases Have Less Effect

There is one other major advantage to a repayment mortgage, especially if you have a variable interest rate type of mortgage.

If the interest rate goes up, your payments will not go up by as much as they would with an interest-only mortgage.

The reason for this is quite simple, really. As we found earlier, with a repayment mortgage, your monthly payments are only partly made up of interest– the other part is a repayment on the capital sum itself. So when interest rates go up, only the interest part of your monthly payment gets bigger – the other part stays the same, reducing the size of the increase.

Compare this to an interest-only mortgage, where your entire monthly payment is made up of interest. If your interest rate goes up, your entire monthly payment will be increased, not just part of it.

This means that an increase in interest rates increases the payments on an interest-only mortgage more than it would on an equivalent repayment mortgage – a big advantage of repayment mortgages.

To read more on this subject please see the list below or your mortgage guide or your home buying guide

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